The drier the soil, the greater the chance a region will flood. That’s because of a chain of weather events leading to hydrophobic soil, which repels rather than absorbs water. First, a drought ups the odds a wildfire will race across a region, and those blazes often take down a whole lot of trees and other flora. With fewer roots keeping it together, soil becomes “like concrete,” says Petra Hoerrmann, an underwriting manager at Northbridge in Vancouver. The hard earth is literally less capable of absorbing water when it finally does rain.

So both personal and commercial property owners may not have bought or built property in areas at risk of wildfire or flooding, “but because of the drought and the loosened soil and the landslide potential and flood potential, you may have different challenges…” There’s more than “just the fire because of the drought.”

The long, dry summer that saw plenty of west coast wildfires could be a factor behind the September landslide near Pemberton, B.C. The Sea-to-Sky Highway, winding from Vancouver to Whistler, saw 150 millimetres of rain over three days. As the CBC reported, one family lost their two-story home, a guest cabin, a greenhouse, three outbuildings and hundreds of fruit trees in the mudslide. The family won’t be able to rebuild on the area—it’s buried under five feet of debris—and their insurer has denied all claims, calling the mudslide an act of God.

Some Californians are also facing drought-related insurance woes—like the inability to buy coverage at all. Insurers have already paid out $1.1 billion in wildfire claims, and the fiery season continues through November, Impact Forecasting reports. Some insurance companies don’t want to stick around for that and are cancelling homeowner policies upon renewal. Allstate even stopped writing new California homeowner clients in 2007.

“While there are currently no laws in California that prohibit an insurer from non-renewing a homeowner’s insurance policy, California law does provide consumers with specific rights in the event of a non-renewal,” the state’s Department of Insurance website reads. These include a 45-day warning, notice of the reason of non-renewal and consistent application of policy cancellations.

Shifting priorities

Drought and its related floods, fires and landslides aren’t that bad north of the border just yet, but “2015 was definitely worse than other years,” says Greg Kostiw, Northbridge’s vice-president of underwriting, western region. “We think that’s going to continue. In the future we’ll probably see that more often, as the climate changes.” And worldwide population growth isn’t helping—even if everyone uses less water, having more people means using more water overall. But Canada hasn’t yet seen insurers abandon entire regions.

What’s more likely, Kostiw says, would be an insurer limiting the number of accounts it writes in a particularly dry region. “We wouldn’t be getting off those risks, but what we might be doing then is talking to the underwriters, saying, ‘Okay, we’ve got a fair number of accounts in that area. We’re at our comfort level, so unless something comes in that’s really, really top shelf, let’s look at spreading our risk.’”

In terms of pricing, premiums are primarily determined by historical losses. “There could easily be no change in price, or even a reduction if there aren’t any losses,” says Kostiw. “…If we determine that we’re losing money in a certain area, we’ll assess that, and we’ll try and determine why. If we think that it is something that we expect to see in the future, then we will adjust our pricing accordingly.” But the current soft market—along with assiduous property owners raking leaves and taking care of their buildings—could also balance out rates or even drive them down.

Pricing could shoot up, however, if a region goes through a prolonged drought. If a community relies on one pond or river that dries up after several years, “we go from a risk that has fire protection capability to a risk that doesn’t,” says Kostiw. That is, it’s going to take a lot longer for firefighters to control any blazes that ignite in the area. “There will be a lot of companies that may not want to write that risk, or if they do, it’ll be quite a high price.”

Drought can also cause a building’s foundation to crack. Soil shrinks as it dries, causing foundations to shift and the buildings above them to twist and crack. Kostiw and Hoerrmann haven’t had any claims from drought-cracked foundations but whether or not that damage is covered “really comes down to individual policy forms.”

And then there are the commercial risks, starting with the expense of power. B.C. businesses depend on hydro power, notes Kostiw, and a prolonged drought would hike energy prices. Regions may see power shortages and some alternative power sources “may be not so environmentally friendly and may produce more greenhouse gasses, which could perhaps cause more climate change, which could just make the situation worse.”

The devastation to farming communities can be brutal, and anyone on the Prairies in the 1980s, for example, can tell you how the hot, rainless days were followed by clouds of ‘hoppers eating what the sun didn’t slowly kill… And then came the foreclosures. But Canadian farmers at least have the avenue of crop coverage through the government level (see sidebar). Private insurance companies, however, come into play when insuring those valuable ranch animals.

‘“In the case of livestock, which we do insure, you can have your income replaced,” says Leonard Sharman, spokesperson for the Co-operators. “For example, if you lose a [herd] of cows, we’d look out at the average of what they’d earned over the past 12 months and pay out that as a business interruption payment, which is essentially reimbursing the lost income.”

But not all commercial risks can be covered, since a drought isn’t like a one-off fire ignited by a careless employee, which naturally falls under business interruption insurance. A lack of water is “a risk of doing business” for industries like pulp and paper, says Hoerrmann, “so if their water source dries up, that’s not insurable through us… Somebody may offer a product like this, which I doubt, but I’m not aware of it.”

The same goes for the marina operator who discovers that low water levels have left his ships high and dry. Because it’s based on environmental factors, drought is “not a normal insured peril,” says Greg Robertson, a commercial broker with R. Robertson Insurance Brokers in Toronto which writes marina and cottage insurance. “Insurance companies can’t hedge on that—it’s like blackjack.”

Ski hills like Whistler also suffer from drought—they need either natural snow from the sky or reservoir water to make artificial snow.

“If they don’t get snow, they’re not going to have skiers, so tourism goes down,” says Kostiw. “Then you start thinking about the trickle-down of the jobs that might be lost, and so on and so forth… We’re talking about the economic impact on the region.”

And if companies are determined to keep production levels up come hell or low water, they may end up clashing with their employees and customers whose taps are running dry. “Large businesses competing directly with the local community for dwindling water supplies,” Zurich wrote in a recent white paper, “should not underestimate the significant risk to their reputations.”

How one government does it

It’s worth a minute to consider the government option for crop insurance.

Saskatchewan farmers, for example, can buy multi-peril policies for drought, frost, flood and/or hail from the Saskatchewan Crop Insurance Corporation. This year, the SCIC covered more than 27 million acres of farmland, accounting for 75 percent of the provincial total. Farms have to sign up by March 31 of each year, when the price paid out per bushel has been calculated for the multi-peril program.

Premiums vary by crop, soil type and coverage level chosen (50, 60, 70, or 80 percent), but the 2015 average was $7.06 an acre (down from $7.47 in 2014). SCIC collected roughly $500 million in premiums in 2015. “Our program is actuarially sound and is designed to break even over time,” says Shawn Jaques, president and CEO of SCIC, which has a reserve of about $1.4 billion. In 2002 alone, “probably our worst year ever,” the organization paid out more than $1 billion in claims.

To make a claim, “you forward your claim form to the local office [after harvest],” says Ray Orb, a retired farmer in Cupar, Sask., who has worked on as much as 1,800 acres. “Then someone comes out to see your fields and measure the grain bins.”

Within a couple of months of a successful claim, the farmer is supposed to have a cheque in hand that they can claim as income for that year, or defer to the following one.

“There are always ways to improve these programs,” says Brady Stadnicki, a policy analyst with the Canadian Cattlemen’s Association in Ottawa. Programs such as the SCIC often rely on low-tech rain gauges placed at weather stations across the province to collect key data, and can therefore miss key variations in microclimate.

“There might be five inches of rain at the weather station, and the payout might be at four inches,” says Stadnicki, “but your fields only got three inches, so there’s that gap.”

— Allan Britnell

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Copyright 2015 Rogers Publishing Ltd. This article first appeared in the November 2015 edition of Canadian Insurance Top Broker magazine